2023-09-05 04:25:15 ET
Summary
- Vontier Corporation's recent quarterly results show declining revenues and profits, but a closer look reveals a company with healthy demand and financial health.
- The decline in earnings is due to the concluding phase of the EMV payment standards' adoption.
- Vontier is also generating robust levels of free cash flows, which is helping it reduce debt and fund share buybacks.
Ever been tricked by a magic trick, only to find out there's more than meets the eye? Investing can feel a bit like that sometimes. You're screening for quality stocks, and one pops up that looks, well, disappointing. Sliding revenues and drooping earnings might make you swipe left, thinking it's a sinking ship. But what if that same ship is secretly patching its holes and prepping to sail smoother than ever?
Dive deeper, and you might just discover a company like Vontier Corporation (VNT). I've talked about them before , hinting they could be on the brink of something promising. The company's recently released quarterly results have reaffirmed my belief that Vontier is poised to do well in the future. At first glance, it might look like it is struggling with weak revenues and profits. But a closer look tells us a story of a company enjoying healthy demand and bolstering its financial health.
I believe Vontier is an under-the-radar comeback kid that deserves a prime spot on your watchlist.
Earnings Recap
First, let's break down Vontier's recent quarterly performance . The company's revenues declined by 1.5% year-over-year, settling at $764 million. When we talk about core sales - which remove the effects of one-off factors like acquisitions and currency fluctuations but include the impact of the EMV sunset - we see a dip of 1.6%. Adjusted operating profits stood at $160.1 million, marking a 4.1% decrease. However, net income per share climbed to $0.62 from the previous year's $0.21. But it's worth noting this increase was propelled by one-off events. When we set those aside, the adjusted net income landed at $0.67 per share, down from $0.72 in Q2-2022.
But don't jump to conclusions just yet. This decline in earnings wasn't a result of operational mishaps or a dwindling demand. Instead, it was a byproduct of the concluding phase of the EMV payment standards' adoption. For context, fueling stations have been updating their payment systems to align with the Eurocard, Mastercard ( MA ), and Visa ( V ) (EMV) standard. This transition injected momentum into Vontier's earnings and cash flows. The EMV replacement cycle strengthened the company's dispenser, allowing it to expand its installed base, increase its market share, and open up aftermarket parts and services opportunities.
But now that the transition has largely been completed, the demand for this particular work has dropped. Vontier has been winding down this operation but it decided to accelerate this activity in 2023. This involved numerous measures, including rightsizing of resources. At the start of this year, the company said that the EMV sunset would negatively impact revenues by $300 million, operating profit by $150 million, and margins by 250 basis points.
Yet, it's crucial to underline that Vontier's products are still seeing robust demand from the mobility sector. This observation crystallizes when we eliminate the influence of the EMV sunset and delve into the company's performance across different segments .
Expanding on the point above, though Vontier recorded reductions in both GAAP and core sales, a different picture emerges when we sideline the EMV's slowdown effects. Adjusting for these factors, the company's sales (referred to as baseline sales) witnessed an encouraging 8.6% uptick year-over-year.
The primary driver behind the decline in both GAAP and core sales was the Environmental & Fueling Solutions (EFS) segment's underperformance. Representing Vontier's most significant chunk in both sales and operating profit, EFS saw drops of 9.6% in GAAP sales and 8.5% in core sales. But, it's important to note that this segment felt the most substantial brunt of the EMV sunset. Had that not been a factor, the segment would have witnessed a 9% surge in sales, which would subsequently have propelled the overall sales upwards. The takeaway here? Even if the numbers seem bleak at first glance, its foundational business is still thriving.
Meanwhile, Vontier's second major segment, Mobility Technologies ((MT)), painted a rosier picture. It recorded a 13.4% growth in sales, out of which a 4.6% hike in core sales and the rest stemmed from acquisitions. And once again, without the EMV's influence, the core sales growth would've soared even higher, reaching around 10%.
Looking Ahead
While recent figures show Vontier's dip in revenues and net profits, it's essential to discern that this was solely influenced by the EMV's waning effect. Peel back that layer, and you'll find a company with a robust core business that continues to attract substantial demand across all segments-a promising sign for what lies ahead.
The broader mobility industry is on a mission - to amplify productivity, enhance efficiency, and navigate the labyrinth of ever-tightening regulations. Vontier's clientele is investing heavily in revamping and advancing their operations. Such endeavors are likely to cast a positive glow on Vontier's future performance as all of its segments could enjoy healthy demand.
Vontier's MT segment is riding the wave of burgeoning demand for cloud-powered solutions that drive both asset and labor productivity to new heights. The company is adeptly responding to this call, rolling out tech products tailored for EV charging networks, car washes, fleet operators, and convenience stores. Meanwhile, in the Repair Solutions arena, the unyielding demand for specialized tools from technicians and franchises has enabled Vontier to expand the reach and reputation of its Matco Tools brand.
Diving into the EFS segment, it's evident that Vontier is reaping the benefits of a vigorous demand for dispensing equipment and aftermarket components. Customers are in a race, not just to modernize but also to amplify their facilities, translating into an uptick in orders for Vontier. Furthermore, the company's commitment to fostering innovation and catering to the nuanced needs of its clientele is noteworthy. A shining example is the EFS segment's automated tank gauge system. Freshly stamped with the California Air Resource Board's certification, this system stands out as a pinnacle of advancement in its domain.
The concerted strength across all these segments underscores the resilience of Vontier's core operations. Even though the waning EMV volumes currently eclipse this vibrancy, I believe its effects will likely diminish by 2024. As the fog of EMV recedes, Vontier might well see a resurgence in year-over-year growth metrics.
In my view, another testament to Vontier's solid operational core is its prowess in churning out robust cash flows. This financial muscle, palpably flexed in the latest quarterly figures, is playing a pivotal role in bolstering the company's fiscal health.
Note that Vontier's sizeable debt has been one of the company's weakness, as I highlighted in my previous article. With a Net Debt to Adjusted EBITDA ratio that soared beyond 3x, it overshot the firm's target bracket of 2.5x to 3.0x. This elevated debt profile was a prominent blip on Vontier's radar.
However, Vontier has been on a roll this year when it comes to generating strong cash flows. In the first quarter alone, the company reported an impressive $77.9 million in free cash flows - that's after deducting capital expenditures. Keeping up the momentum, the second quarter witnessed free cash flows of $76.8 million. This means, for the first half of 2023, the company raked in about $155 million in free cash flows. That's a significant leap from the $53 million reported in H1-2022. What's more, Vontier's proficiency in generating free cash flows is only getting better. In H1-2023, the company managed to convert a whopping 73% of its adjusted net profits into free cash flows. For comparison, this figure stood at 22.8% during the same period the previous year.
This commendable ability to amass free cash flows provides Vontier with a sturdy financial backbone, paving the way for creating more shareholder value. This can be achieved through meaningful debt reduction or rewarding shareholders directly. And Vontier hasn't been shy about exercising these options.
By the end of the last quarter, the company's total debt had shrunk to $2.44 billion, down from $2.62 billion at the end of Q2-2022. Concurrently, its coffers swelled, with cash reserves jumping from $127 million to a robust $244 million. These moves have effectively reduced the company's net debt to around $2.2 billion from almost $2.5 billion, bringing its leverage ratio to a more palatable 2.9x. This aligns well with the company's target range.
An interesting tidbit: Vontier has set its sights on reducing its debt by $250 million this year. But given its current trajectory - with a $200 million debt reduction already in the bag in the first half of the year - I believe it might very well surpass that target. Given the company's knack for generating hefty free cash flows, as evidenced in the previous quarters, there's every reason to believe the latter half of the year will further drive down that debt.
As Vontier's three business segments consistently see healthy demand from the mobility industry, the company's profitability remains robust. This translates into notable free cash flows. With its financial health already on an uptrend, increased free cash flows should further bolster cash reserves and decrease gross debt. Consequently, we can expect a significant drop in net debt and a favorable shift in the leverage metric, perhaps even moving towards the lower end of Vontier's target range.
Moreover, Vontier's abundant free cash flows empower them to fund shareholder returns via buybacks. The company initiated its share buyback program last year, resulting in a 9% decrease in outstanding shares to date. Having allocated $50 million to repurchase 2 million shares this year, the continued influx of free cash flows could see more share buybacks and further dwindling in share count.
Takeaway & Risks
While Vontier's headline revenue and profit figures may not be spectacular, the strength of its core business is evident. It's reasonable to anticipate sustained profitability and free cash flows for Vontier. As the aftereffects of the EMV sunset diminish, possibly by next year, we might witness a YoY surge in both revenues and profits. Moreover, abundant free cash flows should enable Vontier to enhance its balance sheet and further buy back shares, positively influencing its share price. Presently, Vontier's stock seems fairly priced at 11.2x forward earnings, slightly above its five-year average of 10.1x, as per Seeking Alpha data . I'd categorize the stock as a hold at this rate.
Yet, it's essential to be aware of Vontier's vulnerabilities to economic downturns, particularly the menace of rising interest rates. With the US Federal Reserve hiking the rates to between 5.25%-5.50% - the highest in over two decades - to combat inflation, corporate profit margins are under pressure. The mobility industry hasn't notably curtailed its spending in response, but if economic conditions sour, this might change. A potential decrease in demand could adversely affect Vontier's earnings, revenues, free cash flows, and future growth potential. Consequently, this would negatively impact the stock. Potential investors should consider these risks before acquiring Vontier's shares.
For further details see:
Vontier Corporation: More Than Meets The Eye